SA needs a concrete BRICS strategy

Heads of state of the BRICS countries are gathered in Ufa, Russia, this week for the grouping’s seventh summit, which comes at a particularly challenging time for Russian diplomacy. Precipitated by the conflict in Ukraine, Russia is barred from the Group of Seven/Group of Eight processes and increasingly estranged from the West.

It intends to use the BRICS summit to project itself as a major global power.

By holding the summit at the same time as the annual meeting of the Shanghai Co-operation Organisation (SCO), Russia is attempting to impress its Central Asian neighbours and highlight its growing strategic co-operation with China, co-organiser of the SCO. This also sends a message to the West that Russia has other platforms on which to challenge for global power. Russia’s agenda preferences can be conceived along two axes: global security and politics; and economics.

“BRICS heads of state and government hold hands ahead of the 2014 G-20 summit in Brisbane, Australia (Agencia Brasil)” by Roberto Stuckert Filho

BRICS national security advisers are meeting regularly, discussing a range of international issues such as the rapidly evolving situation in the Middle East, to the extent that the BRICS can agree on co-ordinated positions on such difficult issues. This will presumably build the group’s coherence over time.

Offsetting this potential is their disagreement on how to reform the United Nations Security Council — a key gap since it is at the apex of the global security architecture. Accordingly, Russia emphasises economic co-operation.

Discussions at the Ufa summit are broadly divided into two parts: the financial co-operation package and the evolving Strategy for BRICS Economic Partnership.

The strategy is too general and vague and unlikely to grow in substance at Ufa. Perhaps, for this reason, the Russians are pushing for a move beyond a strategy “on paper”, to identify concrete trade and investment projects up to 2020.

Nonetheless, three top priorities appear to have been identified in the BRICS economic strategy discussions.

First is co-ordination on e-commerce, and Russia proposed the establishment of a working group. This was apparently downgraded to a limited agreement to convene a dialogue leading, possibly, to the establishment of a working group.

More cynical observers of the BRICS believe Russia wants to use this discussion to market a cellphone operating system they have developed.

Second are ongoing discussions about trade facilitation. These centre on the creation of a virtual working group on trade and export promotion agencies. There have also been discussions about establishing a single window for electronic processes connected to trade.

Third, China has proposed closer collaboration on intellectual property rights regimes. Observers are understandably sceptical of the prospects and co-ordination possibilities, since the focal points in each country are not obvious. But agreement has ostensibly been reached to exchange information on member states’ systems.

At Ufa, there will be much discussion of the two signature BRICS achievements to date: the Contingency Reserve Arrangement and the New Development Bank.

Given the closed nature of BRICS processes, it is difficult to discern SA’s positions on the grouping’s economic agenda but some contours are apparent.

SA seems to regard the economic partnership strategy as being weak and less of a roadmap of how to get things done than a “ticking the check box” exercise for Russia to notch up some “success”.

For SA it is not clear how the strategy will promote more value-added exports and attract investment in minerals beneficiation or processing at source. The draft trade ministers’ joint communiqué is seemingly noncommittal and soft.

SA has some challenges with agreeing to create a single window for trade facilitation. It has to navigate through legal arrangements within the Southern African Customs Union, especially on external agreements SA has with third parties that may see the free movement of goods in the common customs area.

Although the government supports India’s proposed business travel card, modelled on the Schengen visa arrangement, SA views it as unfair that its liberalised visa arrangement for the BRICS countries has not yet been reciprocated.

Several working groups have been set up under the auspices of the BRICS Business Council: for manufacturing, ICT, small business and finance. The president of the South African delegation to the council, Brian Molefe, proposed new working groups for deregulation and agribusiness.

South African business is interested in common issues affecting BRICS trade and investment and specific issues pertaining to particular companies and industries — such as pharmaceuticals — for which they want to identify important platforms for joint technology development.

They support the trade facilitation agenda in principle, but want progress in promoting transparency in the financial incentives each country makes available to its companies, and progress in approvals for businesses from other BRICS countries.

They want to promote “fair” trade. The concern is that SA has the lowest average import tariffs of all BRICS countries, but implements the fewest nontariff barriers.

South African business representatives to the BRICS Business Council are concerned about how the government is managing the BRICS process.

It is regarded as too bureaucratic and there is a strong feeling that the government is not prepared to tackle the real issues, such as “fair” trade.

There are problems within the council. Brazil has not been driving the process, and Russia and China are represented primarily by state-owned enterprises — unlike India, Brazil and SA — with the interests of the private and state sectors not being sufficiently aligned.

The BRICS process seems to be of limited use to South African business.

Promoters of the Contingency Reserve Arrangement argue that it will provide “insurance” to SA in the event of investment status downgrades by the ratings agencies, and an ensuing capital flight — an increasingly likely proposition. SA could tap these resources during balance of payments crises, enabling the government to cover calls on forex reserves.

However, the Contingency Reserve Arrangement is not capable of providing more than an initial first line of support. The amount SA could call from it is capped at $10bn — twice its contribution of $5bn — a small fraction of the daily turnover in South African currency markets. But only $3bn can be called without recourse to the IMF.

Clearly, a lot more money would be required to prevent a run on the rand, assuming the South African Reserve Bank wishes to intervene to prevent a slide in the currency, which it does not. In the extremely unlikely event that such funding was to be sought, it would come from the International Monetary Fund (IMF). The Contingency Reserve Arrangement rules explicitly provide for this. The idea put forward by some BRICS promoters, that the Contingency Reserve Arrangement will enable the BRICS countries to avoid IMF conditionalities, therefore holds no water.

South African officials have indicated they will seek to revive African infrastructure development as an important issue for the Ufa communiqué. They are of the view that this lost momentum during the 2014 BRICS summit. There is much speculation about the New Development Bank’s Africa Regional Centre, whose agreed establishment is regarded as a diplomatic victory for SA.

The government is still working on the Africa Regional Centre’s articles of association. There seems to be agreement it will be located in Johannesburg. It could, in effect, be a “mini New Development Bank”, targeted at African markets, but it is not clear how it will relate to the New Development Bank’s head office in Shanghai, and what autonomy it will enjoy.

The BRICS Business Council has expressed an interest in playing an advisory role in the New Development Bank, as it wants more say in project selection and the disbursement of funds. But there is no clarity on the interest rates that will be charged; how small and medium enterprises will be treated; the methodology to be applied in selecting projects; and how considerations such as sustainability will be integrated into project design and selection.

Further complicating matters, the government recently decided to join the Asia Infrastructure Investment Bank, which will be heavily focused on infrastructure projects in Asia. It is not clear what the strategic value of this move is — apart from earning kudos from China. But it could erode the effectiveness of the New Development Bank and the Africa Regional Centre.

The BRICS agenda for Ufa is ambitious. It is important SA identifies its clear interests and thinks carefully about its allocation of resources vis-à-vis potential returns.

This article was co-authored by Peter Draper and Mzukisi Qobo, and was published 6 July 2015 on Business Day Live.